Saudi Aramco Base Oil Company - Luberef (2223) Earnings Call Transcript & Summary

Hello, everyone. This is Ahmed Aljiffry, Luberef's Investor Relations Manager, and I would like to welcome you today to our 9 Months 2024 Results Quarterly Call. It's a great pleasure to be joined today by our new CFO, Mr. Saud Kamakhi, who is going to be hosting this call. I'd like to remind you that this webcast is going to be recorded. We're going to have a highlight on our session. And if you're joining us utilizing a mobile phone, I would advise that you tilt it sideways to make sure you see the slide deck properly. Before we dive into the presentation, I would like to draw your attention to our cautionary statement. In today's presentation, we may be giving some forward-looking statements and referring to estimates and expectations. Actual results may differ based on the materiality to the factors stated in this slide. With that out of the way, I would hand over the call to Saud.

Thank you, Ahmed. Ladies and gentlemen, thank you for joining us today at our earnings call covering our performance for the first 9 months of 2024. With high tensions in the region and volatile market, we maintained our focus on delivering excellence in our operations to ensure the creation of shareholder value even in such market environments. We remain committed to the safety of our facilities and operations and it has been proven that our strong safety performance would result in high reliability and execution as well. And this can be seen in our outstanding total recordable incident rate of 0, which played a critical role in achieving our industrial-leading mechanical availability of 99.6%. Our commitment to excellence does not only reside in our facilities. It also expands to the communities around us. And to highlight that commitment, we are proud to announce the release of our first sustainability report, which is available in our website. We continue to target unique opportunities, which will position us as an advantage to the competition by targeting advantaged base oil feedstock. As such, we are progressing with a potential Group III plus project, as our Board has authorized us to proceed with the pre-FEED phase. Progress has also been made in LubeHub initiative with APAR signing a conditional investment agreement with Park Manager, Jabeen. If all goes well, we hope APAR to break ground next year and become our first customer in the LubeHub. Finally, with the challenges we are facing when it comes to the freight rates, we have signed an MOU with Bahri Chemical to evaluate a different strategic approach. One of the options under evaluation is to fully charter a ship and utilized Bahri to operate the ship and leverage their commercial arm to ensure the ship is utilized during backhaul operations. This collaboration can lead to optimized freight costs. In summary, while markets are quite volatile and regional tensions are impacting some aspects of the business environment, we are maintaining focus on the elements we have control over, and this is to maintain an excellent operational track record and to focus on identifying new opportunities that are unique to us and would place us in an advantaged position to the competition. Moving to base oil crack margins. spreads appear to have stabilized around 10 years average with a normalized year-to-date average coming at SAR 1,781 per ton. Most consultants seem to believe this is a good price range for the rest of the year. Moving to our year-to-date performance numbers. Starting off with our base oil sales volumes, sales volume are slightly higher than last year coming at 929.18. Crack margin so far this year were lower as spreads have normalized from the comparative period. And revenue for the period are higher on a comparative basis, mainly due to higher byproduct prices. As a result of lower crack margins, EBITDA and net income dropped by 37% and 38%, respectively. We still maintain a strong ROACE of 24% in normalized environment. Operating cash flow is coming at a healthy level of around SAR 1.2 billion. Moving to CapEx. Overall, is lower compared to last year with sustaining CapEx higher, mostly due to the spending on the new catalyst areas this year and ongoing transformation-related CapEx. Our cash conversion is 106% as the positive working capital changes carried over from last quarter unwinds. Before we move to the net income analysis, I would like to highlight, we are still maintaining a robust balance sheet with a negative gearing ratio of minus 5%. Looking at our year-to-date performance in comparison to the same period last year, we can observe the impact of the lower crack margin on both base oils and byproducts on the net income. However, higher volume had a slight positive impact. Walking through the rest of the elements of the waterfall charts, our OpEx remains at a similar level of a comparative period once last year's debt reversal is normalized. Zakat and tax are lower mainly due to lower net income and a Zakat base, which has resulted from paying down the debt earlier this year. Moving to the cash flow analysis, we were able to maintain a healthy level of cash generation, which has resulted in a healthy cash balance even after paying down our loan earlier this year. For the rest of 2024, we'll remain focused on our core principles of safe and reliable operations, and we will continue to explore and identify opportunities that will create a unique value proposition to our shareholders. Now I will hand over to Ahmed to start off our Q&A session.

Thank you, Saud. We'll start off our Q&A session. [Operator Instructions] I don't see any hands up. Okay, very good. Okay, Mr. Fawad, you can unmute yourself and proceed to ask your question.

Salam alaikum. This is Fawad Khan from Alinma Investment. I have a few questions regarding the third quarter performance [indiscernible], obviously, some questions are the company's latest update on the MOUs. So I'll start with the MOUs, there are 2 MOUs that company have signed. One is conditional. If you can shed some light on what are the conditions? And what are the expected time line, if any, on the -- let's say, MOU being converted into some tangible investment going forward. Number two, the second MOU that you have signed with Bahri. So if we can have some colors on the potential saving in the logistic cost for the company's export. That would be helpful.

Okay. So the question -- the first question is regarding the MOU between Jabeen and APAR, and the time line, which can benefit a Luberef in terms of the implementation of the LubeHub initiative. And the second question is related to the value -- potential value being realized with the Al Bahri. You can proceed.

Thank you for this question to -- and this is to highlight recent signed APAR with -- during ICIS in the first quarter with the Jabeen, which is the Park Manager of -- and that's to establish the industrial facility to transform an oil and wild oil on the LubeHub. And expectation is to hopefully that will break ground next year. So APAR would be -- that would be our first customer in the LubeHub. And this supply agreement is still under negotiation and potential volume 100,000 ton per year that will be supplied locally to the -- to APAR. For Al Bahri, also that memorandum of understanding had been signed with Al Bahri. And this is -- just as mentioned during the presentation, where a situation of Red Sea remained tensed, our logistics team developed a good understanding of the landscape and environment and trying to manage and mitigate any of tensed situations. So currently, company have not been materially affected so far, and we are expected that for nearing and expected to have a crack margin of currently 40 ton when compared to prior year. So this will include also costs related to testing of any mitigation plan. So this is our MPK. We are expecting to have half of that is -- probably around half to be saved if everything goes well.

Sorry, so you expected savings is around $20 per ton, if I understand correctly?

Around that, maybe.

Yes. Fawad, obviously, this is going to be covering the volumes which the Bahri agreement covers, which are not yet finalized.

And do you expect to finalize the agreement, if possible?

If we have any update news on that, we'll keep you posted.

Yes. So Fawad, just to give you an idea, the agreement for Bahri to engage in is going to have -- require a long-term agreement. And so the team in finance are trying to make sure that the saving is material over the whole period of the agreement, because if tensions go back -- if the situation goes back to normal, we will be committed to an agreement that could be a higher freight rate. So there is a risk assessment, which the finance team is covering to make sure that when you go in, we generate real value for -- in terms from the engagement basically with Bahri.

Sure. Just a follow-up on the first MOU. You mentioned 20,000 ton per annum supply to APAR?

For APAR? No, 100,000.

100,000 per annum.

Potential volume up to 100,000.

Next, we're going to move to Mr. [ Muhammad Faryal ]. Kindly unmute yourself and proceed to ask your question.

Salam alaikum. [indiscernible] for today's result. So thank you for having us on the call. Just a question regarding, I believe you mentioned that you're progressing with the brief front end in engineering design for Group III and Group III plus project. Can you shed some light on that, please?

So this regarding the project issue communicated earlier in Q1 and this is an update [indiscernible].

Are you saying to [ Jazan ] here?

Sorry?

Are you saying to Jazan?

We have...

Yes, sure.

The location is not finalized. So it's a Group II plus project right now.

So Muhammad, as we mentioned, we are trying to leverage our strategic partnership with Saudi Aramco here. So this project is -- we are trying to target the streams, which is ideal for our Group III and Group III plus base oil. So we concluded optionality studies, so we are proceeding now with the pre-FEED study. Just to be FIDs, however the project passed the visibility optionality. So, our -- after it moved from pre-FEED, then it will go to a second gate of FEED, we'll go to the final investment decision, FID and then to the APC. So the Board just approved recently what we mentioned is the pre-FEED stage, just to be clear on that.

Okay. Next, we'll go to Mr. [ Akash Kumar ]. You can unmute yourself.

I have a question on the Yanbu expansion of 175,000 tons for next year. Can you give us more color on when can we expect the project next year? Will it be first half or second half? And any update on this project?

So I think you are referring to the -- our Growth II project here. So as of now, we are progressing as planned and it's targeting to be in 2025. So I'll -- company will always be providing update from the next annual call going forward.

So just to highlight this to the end of 2025, Akash. So we have everything question from Mr. [ Miti ]. I would like to know the reason for the volume weakness in Q3 2024, and do you see an impact in Q3 from a logistic cost increase?

So this is a good question. And I while sales volume are slightly higher than last year, we -- comparing year-to-date of 929 Kt comparing to 918 Kt. Also, as we mentioned during the presentation. However, our sales quarter maybe did not meet an expectation as recorded on around 322 Kt. The lower-than-expected sales volume was mostly attributed to the fact that we were operating in a very low inventory, which meant we had to maintain a very tight operation at that point, when it comes especially to ship arrivals and production and scheduling. So this is mainly the reason on that. Thank you.

The second element of the question is regarding to the impact of freights in Q3? So generally, Miti, freights have increased, and as highlighted by the CFO and the Bahri question, our thought, were nearing the threshold of $40 per ton that we estimated. Most of the impact is coming probably due to recent escalations. And that's why we take it upon ourselves in every call, to identify opportunities for reducing the freight cost or optimizing it, as well as making sure that we have the right mitigations in place in the event that the situation can get worse. So we had the Bahri MOU. Previously, we had the agreement with Uni-Tankers. And as we communicated previously, we have other alternatives in place like the DHL arrangement and looking at alternative storage facilities. So this is an ongoing activity because we believe that, that increase in freight, if can resolve will immediately translate to improvement in crack margins that the company realizes. I hope that covers the question. Saud, do you want to add anything?

No, this is a continuous management commitment to all that freight cost optimization project.

Yes, [ Matthew ]. So on a year-to-date basis, the increase on a per ton basis for the export volumes is nearing the $40 per ton. Differential compared to '23. Are there any remaining questions? Please raise your hand if you'd like to ask the question. Mr. Fawad Khan, you can unmute yourself and proceed to ask a question.

I just wanted to ask a question on the overall outlook for the margins, both Group I and Group II. And if we can highlight the update on the margins on the Group III products, how it has behaved for most of this year and how you expect the Group III margins to behave in going into 2025 and beyond?

It's a general question on the outlook, starting from our products. And then regarding the products that could potentially be produced from Group III.

So generally, we do not provide outlook from ourselves. But however, we saw some statistics and some consultants provide certain outlook, and we are looking on that from that analyst -- from those analysts that stabilized price on the upcoming period of the year. So those are related for group -- from the groups of base oil.

Okay. So this is covering I and II. Generally speaking, Fawad, we don't spend a lot of time on Group III just yet. However, a recent high-level check, and that where it came to us is that it still maintains a $300 per ton premium. And that's why we -- whenever we talk about the Growth II projects, we highlight 1 of the important factors is the flexibility, because sometimes that $300 per ton is not worth the all of the diesel that you produce. It might make more sense to produce more Group II and have less diesel on as a byproduct. So when you talk about Group III, you're assuming a drop of volume of around 50%, 33% from Group II levels to 40% to generate the $300 per ton. So sometimes it might not be worth it. And that's why the asset optimizer will maintain focus and making sure that we generate the best netbacks.

So overall, the breakeven level for the Group III margins is around $200 per ton, if I understand correctly, from switching from Group II?

Yes, from Group II.

Okay. Sure. That's quite helpful.

Do we have any remaining questions on the call? Okay. We have a written question from [ Mati ]. Is diesel crack margin weakness create an incentivize mechanism for these refining industry convert to base oil. How is it too for that conversion in terms of CapEx?

Yes, I can take -- so usually, what we see in that is the incentivize between the base oil and diesel usually it comes on -- when it reached to $35 to $50 spreads between both of them from -- to convert that is not -- maybe does not require that much of CapEx for all refineries. However, it takes a lot of requirements to switch the production. From a cyclical perspective, I think maybe Ahmed can elaborate on that from -- the switch from diesel to base oil in there.

Okay. So to shed the technical light on, Mati, first, you need to have the unit in place and the right catalyst in place. So it's not the immediate switch. You have to have the unit already designed for that production. The second aspect is you have to have the right feedstock. So for an integrated facility, base oil is typically around 5% at maximum of their production volume, typically it's around 1%. So they need to look at the wholesale economics because typically, advantage based on feedstocks are usually more expensive than the regular feedstock that you target for production of other fuels. So it's not an easy switch. They need to secure the feedstock, change the refinery -- the crude diet for the facility. And then obviously, you have to have the asset in place and ready to operate. One thing to always emphasize on, whenever I have this flexibility, it means you have lack of utilization in a unit. When you have flexibility there is -- it means that there is unutilized assets. This is something we don't experience in Luberef. We're always push our units to run 100% as much as we can. That's why we look for intermediate feedstocks for the subsequent units are filled, and this will ensure that we have the lowest cost of production when we compare starting. Hope covers the question, Matthew. If anyone has any additional questions, you could take them on. Okay, Mr. Fawad, you can unmute yourself and proceed to ask your question.

Can you hear me now?

Yes.

So my question is on the company guidance on the volume. I was just looking at the first quarter and second quarter presentation and there was a guidance of single mid-digit volume growth for this year, 2024. So with this 9 months already in the bag, so what kind of growth volumes we should expect for the remaining 2024?

That's a good question, Fawad. So it's regarding the volume against the guidance in terms of growth. So we guided for mid-single digit. So that's giving the number of around 4% to 6%. I think it's going to be a stretch for us to achieve the 4%. There is going to be growth. We're hoping to deliver the targeted as much as we can.

We are working in the last quarter now to try to maximize our efforts in order to achieve that guidance. And hopefully that by the end of this year when we report our final numbers that achievement is there. So we are doing our best to achieve that target and the guidance.

So if anyone has any remaining questions, you can proceed to ask now. So Mr. Matthew, you're asking as a follow-up question on the previous question. In the context of what is the likelihood of global diesel refineries comparing to base oil and reduce the base oil crack margins as the base oil crack margins have really held up strongly. In face of global sell-off in Singapore complex refining margins. Yes, I think just let I need to -- okay. So that's the end of the question. Okay. So from diesel -- you have to look at base oil, Matthew, from a global perspective because it's -- there's a lot of regional differences. So in terms of Asia, diesel margins have been weak for quite some time, and we follow the Asian index. Yet base oil spreads had held strong. So you would assume that if anyone has the facilities in place, they would have started access to this data. And currently, what the analysts are forecasting that if there are any future pressures in prices, it's most likely going to be in Europe and the U.S. because there is a premium over there compared to Asia. So additional volumes will target the Europeans and the U.S. markets. I hope that covered it off when you mentioned Singapore or are you referring to something else? Okay. So that's clear for Matthew. So if anyone has any remaining questions, can you raise your hand or you can tap them in. Okay. So with no remaining questions, I would thank you all for joining our call. If you have any follow-up questions, please do reach out to us in our -- through 1 of our IR portals, whether it's via personal email or in 1 of the 1 -- 1 engagements that are coming up. And thank you again for joining us.

Thank you.

Bye-bye.